Assured Guaranty refutes bond claims

Friday

Aug 24, 2012 at 12:01 AM

Assured Guaranty Ltd., which stands to lose millions of dollars if Stockton wins permission to default on some of its municipal bonds, Thursday countered arguments it and investors should take the hit because city officials were misled about risks those bonds posed.

Reed Fujii

Assured Guaranty Ltd., which stands to lose millions of dollars if Stockton wins permission to default on some of its municipal bonds, Thursday countered arguments it and investors should take the hit because city officials were misled about risks those bonds posed.

Jeff Michael, director of the Business Forecasting Center at University of the Pacific, said in a report Tuesday that the now-defunct Lehman Bros. brokerage misled and deceived Stockton officials in 2006, glossing over the risks of issuing $125 million in pension obligation bonds.

"Since the bonds were deceptively sold to the borrower with understated risks, it seems investors should bear some of the responsibility of those risks," he wrote.

Not so, Assured Guaranty responded Thursday.

"If the city believes that third parties misrepresented the risks of the pension obligation bonds transaction, the city should seek recourse against the persons or firms responsible for such actions, instead of seeking to renege on its obligations to Assured Guaranty and the holders of the pension obligation bonds," it wrote.

Michael argued that Assured Guaranty officials did play some part in the bond issue, saying, "They ... should have been aware that city officials clearly were misinformed about the risk by the underwriters," he wrote.

The New York-based insurer said it never knew of any such misrepresentations and Michael clearly mistakes the role of bond insurance.

Its primary benefit is to reduce the bond's interest costs.

And the company said the city solicited its help in providing that coverage.

"In the case of Stockton, Assured Guaranty's bond insurance provided the city with significant interest cost savings and liquidity," it said.